We are in the middle of the annual meeting cycle. Most public companies are sending around proxy materials and seeking the election of directors for another year (or three years in the case of those with a staggered board).
Most shareholders are asked to vote on a single, unopposed slate of directors. Although all shareholders have the legal authority to nominate directors, the candidates in the proxy statement have been nominated by the board of directors. Shareholders do not typically run competing slates because of the costs associated with the proxy process. Moreover, while the costs of the solicitation of management's nominees are borne by the company, the costs of the solicitation for shareholder nominees must be borne by the shareholder.
Running unopposed, the directors nominated by the board will always be elected. The one slight variation is that a number of public companies have in place majority vote requirements. If directors do not receive a majority of the votes cast, they must submit letters of resignation. It is then up to the remaining directors to decide whether to accept the resignation. The dynamics of board behavior suggest that in many cases the letters will not be accepted.
This suggests that, structurally, directors are not at risk of losing their position on the board through shareholder opposition. Thus, directors approving practices opposed by shareholders (excessive compensation, for example), are not likely to lose their positions.
On the other hand, a director will lose his or her position if not renominated by the board. Conventional wisdom has it that directors who have an antagonistic relationship with the CEO are at risk for not being renominated. The antagonistic relationship can presumably arise from personality differences. They can also presumably arise from genuine differences in policy, including those involving executive compensation.
The WSJ recently described efforts by Bank of America to alter the composition of the Board of Directors. The Board had apparently been shaped by pressure from governent regulators during the post-financial crisis period. With the pressure off, BofA had greater flexibility to shape the board in a manner deemed best for its business.
According to the article, BofA had replaced "financial experts" on the Board with executives from "heavily regulated, highly competitive industries often plagued by thin profit margins." As the article observed:
- In its search for new directors, the bank is looking for people who can help find ways to increase profit margins. Bank of America's return on assets in 2012 was 0.19%, compared with 0.97% for all U.S. banks, according to Federal Deposit Insurance Corp. data.
The article also noted, however, that some of the departed directors were described as those who "didn't click with" the CEO or had "tended to ask the 'tougher questions'" of the CEO. See Id. ("'People with knowledge and a deep understanding of the industry, they ask tougher questions than the people who don't know the industry and haven't been around for a while,' said the person.").
There is nothing in the article suggesting that the willingness to ask "tougher questions" was the reason for the removal of any director. Nonetheless, as noted above, such behavior poses some potential risk for directors wishing to stay on the board.